In an upcoming post, I’ll explain that understanding market sentiment and the psychology of other investors in the market is far more useful than technical or fundamental analysis in a bear market. Here’s a wonderful chart of investor sentiment during a bear market. Look below to the right.
In this post, I will detail out exactly what each of these market stages are, and how investors are feeling (what the sentiment is) during each of these market stages. Through understanding psychology, one can predict how other investors will react to certain market events (because human psychology is the one thing that never changes, unless we stop being human).
At this stage, many investors are feeling good about themselves and the markets. It’s been a while since the markets touched bottom, and a lot of people have forgotten that equities were once deemed as “dead”. The public begins to buy (albeit not too much, afraid that stocks will fall), believing the propaganda from the main stream media proclaiming that stocks will go higher, Higher, HIGHER! A few market analysts are calling a bubble, the general atmosphere amongst investors is optimism. The market data is all good.
This is when things really start to roll. Good times are in, and the public becomes accustomed to buying ever increasing stocks. Most investors are buying with both hands now, believing that stocks have yet to double and triple and quadruple. In other words, bubble on! Risk on! A few of the smart investors and hedge fund managers, contrarian to popular belief, believe that it’s now time to short equities and pop the bubble. But of course, no one listens to them, because no one wants to be a disciple of bad news. Market data, of course, comes in with corporate earnings report consistently beating the previous ones.